TOKYO: When the Bank of Japan meets Wednesday, investors may be most interested in whether it will push a key interest rate further below zero. But the central bank is also exploring less-splashy steps that could jolt markets. Atop the list, according to people with direct knowledge of internal discussions, are changes in how it buys Japanese government bonds—a market where some critics see downsides of the BOJ’s monetary-easing program.
The BOJ started applying a minus 0.1% interest rate to some commercial-bank deposits in February, supplementing its policy of buying ¥80 trillion yen ($785 billion) worth of government debt every year. The result was a sharp narrowing in the yield difference between short- and longer-term Japanese bonds, and lower long-term rates generally.
That led to trouble for commercial banks, which raise mostly short-term funds through deposits and seek to profit by lending the money out at a higher long-term rate. Insurers and pension funds, which invest for the long term to meet obligations decades down the road, also suffered as the interest paid on 30- and 40-year government bonds slipped to nearly nothing.
Top BOJ officials initially shrugged off complaints, but now some BOJ board members are considering whether they can push up yields on debt with a term of 20 years or longer, according to the people with knowledge of the discussions. One way would be to shift the BOJ’s bond purchases more toward shorter-term government debt.
That poses at least two possible problems: It could be interpreted as monetary tightening—something BOJ Gov. Haruhiko Kuroda has said is off the table—and there may not be enough short- and medium-term bonds in the market, economists said, to support such an operation for long. “Even if you forcefully steepen the yield curve, it is very likely to turn flat later as if succumbing to the universal law of gravitation,” said Yasunari Ueno, chief market economist at Mizuho Securities.
